Weekly Technical Commentary

EUR/USD

Chart Levels:

Support 1.4200..1.4045..1.3975..1.3882.
Resistance 1.4500..1.4600..1.4815..1.4900.

This week: ↗
This month: ↗

A massive 'spike low' and 'doji-type' candle against retracement support. It should signal the end of the Euro's collapse of the last nine weeks and the start of renewed US dollar weakness. Rising open interest and volumes in the futures contract over the last month suggest many will have to re-think recent moves. Bullish momentum is unlikely to kick in until we can hold consistently above the 1.4800 area, so until then the Euro remains vulnerable. Over the next month or so we favour several sharp moves roughly between 1.4200 and 1.4900, keeping one-month at-the-money implied volatility capped at 15.00%. The Euro is likely to lag Eastern European currencies but gain over Scandinavian ones.

USD/JPY

Chart Levels:

Support 104.50..103.75..102.50..101.00.
Resistance 106.00..106.90..107.75..108.60

This week: ↘
This month: ↘

Financial markets are on the move again after some held nervously in small ranges for several weeks. FX, equity and Treasury debt markets gapping this morning indicate the start, not the end, of large trends. The break below 105.00 may send many into a flap as they are forced to deal with a complex, multi-layered FX situation where the Yen should do better than nearly all other currencies as its banking system is seen as insulated from credit problems. Watch one-month at-the-money implied volatility as this could increase even further, towards 20.00/22.00% as it did in 1998 and 1999. Because the corrective rally from March's low was so slow, the drop we now predict may be extremely fast indeed.

GBP/USD

Chart Levels:

Support 1.7900..1.7800..1.7500..1.7445.
Resistance 1.8130..1.8275..1.8500..1.8800.

This week: ↗
This month: ↗

Cable is trying to base in what is a highly unusual chart pattern that looks like a child's 'spinning top'. Friday's rally has already undone the declines of the previous four days and today's gap higher underlines the change in tone. This at last adds a little weight to our view that US dollar strength is counter-trend and that the terribly sharp moves of the last eight weeks are likely to reverse, at least in part, later this quarter. One-month at-the-money implied volatility at 12.60% today is close to the 1995 peak of 13.80%. If it can claw it way above 1.8200 over the next two weeks rallies may become a little steadier and moves more controlled, allowing for a drop in vol. The pound may gain a little against other currencies too.

EUR/JPY

Chart Levels:

Support 149.00..147.50..145.60..143.50.
Resistance 150.00..152.00..154.00..157.00.

This week: ↘
This month: ↘

Yen crosses have been leading the way, Japan and its banking system seen as a relative 'safe haven' in these very troubled financial markets. EUR/JPY's weekly close below 152.00, the lowest since November 2006, completes a very major super-long term 'rounded/triple top'. Over the next few months we expect this cross to drop to the 130.00 area, in what will hopefully be a steady trend rather than an out and out rout. If the latter were to be the case, one-month at-the-money implied volatility could match its 1999 record 20.00% (and three-month's at 23.00%). This is seen as just the first leg in a series of moves lower, a new long term trend of Yen strength against other majors, erasing much of the rally from 2000.

EUR/GBP

Chart Levels:

Support 0.7900..0.7850..0.7800..0.7745.
Resistance 0.8000..0.8050..0.8100..0.8187.

This week: →
This month: →

Moving back inside the range that has prevailed for most of the last five months, so that the all-time high at £0.8187 looks more and more like some sort of 'false break' or 'spike high'. We shall continue to allow for up to a year's worth of sideways trading in a much broader band than that of Q2 2008. On the Bank of England's Trade Weighted Index the pound is still close to its weakest since November 1996, so plenty of room for improvement there. This week it should hold below 0.8050, dipping to 0.7850 within the next few weeks, stabilising here before dropping towards 0.7800 late this year. Then sideways in a very broad band of at least five pence, potentially with 'spikes' up to ten pence wide.

GBP/JPY

Chart Levels:

Support 185.85..184.00..181.00..179.00.
Resistance 192.50..195.65..200.00..205.00.

This week: →
This month: ↘

Consolidating above 186.00 as expected, allowing other Yen crosses to catch up a bit. Last week's close below 192.00 was the lowest since January 2005 and might make the complacent sit up and take notice. A sustained break below 186.00 confirms that the new ultra-long term trend is to a stronger Yen against the pound, and who cares whether this is because of unwinding of the carry trade or for any other of a myriad different reasons. Our medium term target remains at 175.00 with a good chance of an 'extension' to 165.00 before some semblance of order returns. Note that the bulk of these moves ought to be due to Yen strength rather than catastrophic weakness of other major currencies.

Mizuho Corporate Bank

Disclaimer

The information contained in this paper is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty is made or implied that it is accurate or complete. Any opinions expressed in this paper are subject to change without notice. This paper has been prepared solely for information purposes and if so decided, for private circulation and does not constitute any solicitation to buy or sell any instrument, or to engage in any trading strategy.